Wayne OLeary

Economics of Slash and Burn

Those who cannot remember the past, warned philosopher George Santayana, are condemned to repeat it. That truism has no better illustration than the austerity mania presently consuming Europe and threatening to spill over into the US. The prevalent craze for absolute budget balance and extreme spending cuts in a time of worldwide recession and unemployment has taken on an ahistorical character; it utterly dismisses the experience of the Great Depression and World War II, when deficit spending and unbalanced budgets were the agreed-upon prescription for economic recovery.

The demand-side case for what became known as Keynesianism was substantially proven by the New Dealers between 1933 and 1945. Its fashionable now to doubt the efficacy of FDRs spending programs. Amity Shlaes, conservative Roosevelt detractor, has been all over the serious talk shows lately peddling her polemical tract The Forgotten Man, which denies the New Deal worked. But it did work, as the numbers clearly attest.

When Roosevelt took office in 1933, approximately 25% of the American workforce was without gainful employment. The job-creation programs of FDRs celebrated alphabet agencies (CCC, PWA, WPA, et al.) cut that to 20% within two years and to 14% within four years, where it more or less remained until 1940. Obviously, public spending on jobs did not solve the Depression, but it did greatly ameliorate the situation. By the end of FDRs second term, the number of unemployed had fallen from 13 million to 8 million, a drop of nearly 40%.

The failure of Keynesian policies to completely eradicate joblessness in the 1930s has been held up by Roosevelt revisionists as evidence of their general ineffectiveness. But critics forget the ultimate proof of their success: World War II. Domestically, the war was a gigantic stimulus program, the greatest in American history, dwarfing in proportional terms Obamas comparatively meager stimulus of 2009. Starting in 1941, the buildup to full mobilization caused the federal deficit to rise by over fivefold within two years. At its peak in 1943, the massive production of armaments had increased the deficit by a factor of 15  to $57.4 billion (or 30% of GDP, compared to just 9% today). Besides winning the war, this achieved the added side benefit of virtually eliminating US unemployment, cutting jobless rolls to roughly 1 million, or less than 2% of the workforce.

War is not a recommended way of dealing with depression or recession, although it needs to be said that Afghanistan and Iraq represent our most effective ongoing stimulus program. It would be much better to fund peaceful projects that benefit the nation at home. That, of course, is not where were going. With Europe leading the way, the Western world is on track to cut taxes for billionaires and stifle public spending in a blind, headlong rush back to the laissez-faire, trickle-down days of the 1920s. And American conservatives are egging on the US to follow suit.

The centerpiece of Europes turn to the right is government austerity  in part a panicked response to indebtedness; and in part a perverse attempt to use budget balance and a diminished public sector to somehow spur private-sector growth, cure the recession, and wean citizens away from a supposed enervating dependence on social entitlements. These motivations have little objective basis in reality, but transatlantic conservatives, who control almost all major governments in the European Union (EU), do know how they want to accomplish their ends. Observes The Economist, Round the rich world a consensus has emerged that austerity should mean spending cuts rather than tax increases.

The prevailing slash-and-burn philosophy has found expression in this countrys radical Bowles-Simpson deficit-reduction plan, which gets 70% of its savings via spending cuts despite the overall level of taxes currently paid by Americans on their incomes (17%) being its lowest in 40 years. That coincides almost exactly with the austerity plan of Britains Conservative-led coalition government, 75% of which also relies on spending cuts. Aside from general conservative disdain for government programs, whats behind this unbalanced approach to the frankly overblown debt problem is this: the international central bankers, who are manipulating the puppet strings on behalf of Big Capital, prefer it and demand it. The people responsible for the worlds economic catastrophe, in other words, are dictating the terms of recovery.

The concerns of Europes budget cutters are disarmingly transparent. Quoting The Economist once more, Britains spending reductions are aimed at gaining credibility with investors, Spains cutbacks are calculated to reassure markets, and Portugals continuing budget attrition is geared to calming jittery bond traders. God forbid any of these economic elites should suffer lost confidence. To that end, the EU, through its European Central Bank and in conjunction with the International Monetary Fund (IMF), has elected to punish ordinary people and the governments of its poorer member states.

As a price of retaining membership in the EU, struggling countries must surrender economic sovereignty and any possibility of using stimulative Keynesian remedies to work their way out of economic trouble; this involves not raising corporate taxes, empowering labor, or devaluing currencies, while lowering budget deficits and national debts to severely stringent levels  3% and 60% of GDP, respectively, are the goals. The cost of Greeces $134 billion EU-IMF bailout, for instance, has included salary cuts for government workers, reductions in public pensions, and wage freezes combined with renunciation of the closed shop in the unionized private sector. Irelands $113 billion rescue package likewise mandates public-sector pay cuts, welfare reductions, and emasculation of the minimum wage.

Europes abandonment of social democracy is being paralleled by Americas pending abandonment of its last vestiges of institutionalized liberalism. Even assuming the US has a debt-and-deficit problem of the doomsday variety (a highly dubious proposition), returning to the halcyon days of trickle-down is no answer. Lack of demand is the problem  demand created by employed consumers with spendable incomes, who both add to public tax coffers and simultaneously purchase the products business sells, stimulating further employment. Austerity on the European model wont create prosperity; moreover, further burdening the middle and lower classes, who werent invited to the great party of the past generation, is both immoral and economically counterproductive. Those who threw the party should pay for it.

Wayne OLeary is a writer in Orono, Maine, specializing in political economy.